Manufacturing continues to hold up the economy

The Office for National Statistics (ONS) today announced a 1.0 per cent increase in UK manufacturing output in January, reports Tony Dolphin.

The Office for National Statistics (ONS) today announced a 1.0 per cent increase in UK manufacturing output in January. This figure was artificially boosted by a bounce back from the weather-depressed December level, but there is no denying the fact that manufacturing industry in the UK is enjoying a strong revival. Output is up 6.8 per cent over the last year, though this figure is affected by last January’s bad weather and the underlying trend rate of increase is probably around 6 per cent.

The recovery in manufacturing is a broad-based one. Over the last year, output increased in 12 of the 13 sub-sectors reported by the ONS. Output of electrical equipment and motor vehicles was particularly strong.

The last time manufacturing output in the UK was increasing as rapidly as it is now was in 1994. This was roughly two years after sterling had dropped out of the EU’s exchange rate mechanism and fallen sharply, giving a boost to the competitiveness of UK manufacturing.

There is a clear parallel with the current situation. Manufacturers are enjoying a similar boost to their competitiveness following sterling’s large decline in the second half of 2007 and in 2008. This is shown by the latest trade figures, published yesterday. These reveal an increase of 23 per cent in the volume of goods exported over the last year, excluding oil and erratic items.

This figure is also distorted by the weather but the underlying trend could be 15 per cent or more. It is also evident in the latest surveys of manufacturing industry, which show strong external demand for UK goods.

Of course, manufacturing now represents less than one sixth of the UK economy and what happens in the much bigger service sector matters far more. Here surveys – and recent anecdotal evidence from the High Street – suggest the outlook is more mixed. Still, manufacturing is adding around 1 per cent to annual real GDP growth at present.

The main threats are sterling appreciating too sharply and demand in our key export markets, particularly the euro area, not holding up.

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